Stocks rise following agreement to increase debt limit, avoid default

FRANK RUMPENHORST/AFP/Getty ImagesA stock trader sits in front of his monitor in Frankfurt, Germany, while a broadcast shows President Obama in the background early today.

U.S. stocks rose, sending the Standard & Poor’s 500 Index rebounding from its worst weekly loss in a year, as President Barack Obama announced a deal to increase the federal debt limit and avoid a default.

Bank of America Corp. and Citigroup Inc. paced a rally in financial shares, rising at least 2.4 percent, as lawmakers raced to push through a compromise with Obama to raise the U.S. debt limit by at least $2.1 trillion and slash government spending by $2.4 trillion or more. Exxon Mobil Corp. and Chevron Corp. gained more than 1.4 percent as oil advanced from a two- week low. Humana Inc. climbed 4.8 percent after the managed health-care company forecast higher-than-estimated earnings.

The S&P 500 jumped 1.1 percent to 1,306.95 at 9:33 a.m. in New York. The benchmark gauge slumped 3.9 percent last week. The Dow Jones Industrial Average increased 132.52 points, or 1.1 percent, to 12,275.76 today.

“The markets will have some breathing room,” Keith Wirtz, Cincinnati-based chief investment officer for Fifth Third, said in a telephone interview. His firm manages $16.7 billion. “There are strong signs they are going to pass the legislation and avoid a default. If we get past these issues, stocks will have room to go higher.”

Third Monthly Loss

The S&P 500 posted a third straight monthly loss in July on speculation Republicans in the House would fail to reach a compromise with the Democrat-controlled Senate and Obama to boost the nation’s ability to borrow by tomorrow’s deadline. That concern overshadowed a second-quarter earnings season in which per-share profits have topped analysts’ estimates at 78 percent of S&P 500 companies that have reported so far, data compiled by Bloomberg show.

The House plans votes today and the Senate may follow suit to consider the agreement reached during a weekend of negotiations that capped a months-long struggle between Obama and Republicans over raising the $14.3 trillion debt ceiling. Both parties were working to sell the deal to their rank and file — meeting resistance from social liberals who fault it for failing to increase taxes and from fiscal conservatives who say it’s insufficient to rein in the debt.

Both S&P and Moody’s Investors Service are weighing whether to cut the U.S. credit rating. The impasse boosted to 50 percent the chance that S&P will downgrade the U.S. from AAA within three months, the ratings company said last month.

Interest Rates

If the country defaults on some obligations after Aug. 2 and pays bondholders, S&P said short- and long-term interest rates would rise by 0.5 percentage point and 1 point, respectively. Yields on 10-year Treasuries rose from their lowest level this year, climbing one basis point to 2.81 percent today.

President Obama’s dispute with Congress cost U.S. stockholders $680 billion last week. It may be a clash investors end up embracing, based on more than a century of market history.

The Dow Jones Industrial Average has posted average gains of 12 percent in years before presidential elections since its creation in 1896 and advanced the last 17 times, according to data compiled by Bloomberg and Dow Jones. The 30-company gauge has risen 4.9 percent in 2011, its third-smallest increase at this point of an administration’s third year since the streak of gains began in 1941. It needs to climb another 7.2 percent through the end of the year to match the historical mean.

‘Grand Bargain’

“A grand bargain is just the ticket to power stocks,” Howard Ward, who helps oversee $35 billion in Rye, New York, for Mario Gabelli’s Gamco Investors Inc., said in an e-mail on July 26. “With the Fed on hold, Greece off the table and a bipartisan debt deal in Washington, stocks would be the only game in town.”

A report today may show that manufacturing probably grew in July at about the same pace as a month earlier, showing sales overseas are helping shield U.S. factories from a slowdown in consumer spending. The Institute for Supply Management’s manufacturing index fell to 54.5 last month compared with 55.3 in June, according to the median estimate of 63 economists surveyed by Bloomberg News. Figures greater than 50 signal expansion.

Humana rose 4.8 percent to $78.16. The company forecast third-quarter earnings excluding some items of at least $1.95 a share. On average, the analysts surveyed by Bloomberg estimated earnings of $1.94 a share.